Non-farm payrolls in the US grew at a slower than expected rate in May with pretty significant downward revisions to the previous reports from March and April. As I say each month (to those who will listen and / or care) these numbers are always subject to potential revisions, so we need to focus on the longer term trend, which is to slowing employment since early 2015 (red line on the chart).
One rather important question that emanates from all of this data is whether this will change the US Federal Reserve's decision to raise interest rates on June 15th.
The answer is that it likely will not.
But bond markets (see the gold line of the chart above) are telling us that the economy may not be strong enough to handle interest rate increases. Certainly one reason (as we discuss each week on our client webinars) may be because US households have amassed record amounts of debt again (higher than back in 2008) and having to service that debt with higher interest costs will impact consumer spending (2/3 of the US economy).
And wages (according to today's data) are only growing at a meager 2.5% annually.
We know that bond markets lead all financial markets, but the stock market is, for the moment, ignoring the risk signals being sent by the bond market (see the white line on the chart comparing stock prices and bond yields above).
Because there is so much liquidity in the global financial system (see my blog from May 23 on this topic or for another, somewhat more respected opinion, read Dr. Mohamed El-Erian on Bloomberg).
As we (at High Rock) have been suggesting to our clients and anyone else who will listen, the correlations between stocks and bonds are no longer as reliable as they have been in the past and that a more tactical approach to investing will be necessary in order to avoid larger potential risk and big swings in volatility in your investing portfolio.
Dr. El-Erian refers to it as "changing the way that you are taking risk". Passive "buy and hold" investors (index ETF's are all the rage now) need to take care, you may have quite a great deal more risk in your portfolios than you fully appreciate and many financial advisor's don't / won't see it either.
Being complacent because your equity portfolios have done reasonably well (and every month your statements appear to show growth) is not the answer. Unfortunately, many will have to find out the hard way.
But it doesn't have to be the case.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist